China and the World of Business • China Business and the World

The normally astute (and often erudite) BusinessWeek falters a tad in analyzing the value of the coming wave of airline mergers in the United States.

The question BW asks is almost the right one – it wonders if the creation of a small number of American Megacarriers – Northwest/Delta, United/Continental, and American/player-to-be-named-later – will be enough to fend of European competition. The large U.S. carriers – with the sole exception of Southwest, a huge, well-run discount domestic-only airline – lose money on domestic service, making it up only on international passengers and freight. European carriers are, naturally stronger than US carriers in this space.

Asian Airlines are not Chopped Liver

Not a bad question. I suggest there are two others:

1. Given that there are only two airline models that seem to make money (low-frills and high-efficiency discount, or full-service, long-haul international), how is creating larger airlines that do neither of those very well going to make the U.S. industry any stronger? Nobody seems to have picked up the ugly reality that combining two mediocre airlines does not make the resulting company better – just bigger. Opportunities for economies of scale aside, this will still not solve the long-term problem: with the sole exceptions of Southwest and possibly JetBlue, U.S. airlines are operating on an obsolete business model.

and

2. If you think the British Airways, Lufthansa, and Air France/KLM are such a threat, have you ever paused to consider that Singapore Airlines, Cathay Pacific, and ANA would tear even bigger holes into what have become U.S. carriers’ most profitable markets – the trans-Pacific trade? It it particularly surprising that BW seems to dismiss the Asian carriers completely out of hand. With the sole exception of Virgin Atlantic, I cannot think of a single European carrier that approaches the quality of service, youth of fleet, and profitability of Asia’s leading airlines.

Don’t Follow The Americans – At Least Not THOSE Americans

All of this is instructive for China’s airline industry. As Air China pursues ownership of China Eastern, it heeds my second question while ignoring my first. Yes, it would probably be bad for Air China to stand by and let Singapore Airlines get its nose under the proverbial tent. Apart from that, however, it will simply create a larger, less nimble, less efficient carrier right at the time when the Chinese airline industry needs to rethink its structure.

China would do itself an injustice by learning the wrong lessons from all of the noise around M&A activity in America, and would do better by looking around the world for airlines that work brilliantly.